By Raúl Carrillo
“Where does money come from?” That’s our question. That’s the trump card Deficit Owls play to explain why the case for austerity is shallow and sadomasochistic, now and forever. When one spreads the true answer—that the Federal Reserve creates dollars with keystrokes, that the U.S. government, unlike like a state or a household, can’t possibly “go broke”, that Uncle Sam has to worry about inflation but doesn’t need to tax or borrow to spend—policy creativity explodes. The false choices of public finance are illuminated. We can decrease taxes AND increase expenditures. We can achieve full employment AND price stability at the same time. Once we align conversation with operational reality, and recognize that we can’t collectively run out of money, we can have an honest—if always antagonistic—conversation about what institutions should do to create, administer, and regulate stocks and flows of resources.
That’s the plan, at least.
But there is, of course, another dimensions to all of this: legality. Descriptions of how money flows through the economy are inseparable from questions about the flux of claims of ownership. These complementary inquiries are deeply moral at their core, causing visceral reactions, as they pressure people to consider what they think is a truly fair social order, severed from unnecessary worries about the federal budget. Because these questions are conflict-ridden, they are the province of the legal field, of lawyers, lawmakers, regulators, and judges, who hammer out the statutes, cases, and codes that undergird commercial activity.
The questions are complex, yet intuitive. If the federal government creates money out of thin air, rather than taking it from some people to give it to others, as we have so often been told, then who owns the money? Who deserves the money? If money is not truly a commodity siphoned from the public, but a tool created and distributed by the government and its agents to the public, then who can claim ownership of the money currently wasting away in federal coffers? Deeper, still – who is entitled to the money that doesn’t even exist yet? If there is no money scarcity, only real resource scarcity, then most legal and philosophical conversations about distributive justice are anachronistic and impoverished.
We need a revitalized discussion about public finance and fairness, deeper than the proverbs about affordability and sacrifice. With a rigorous understanding of the legal and operational musculature of the Treasury, the banking system, regulatory agencies, and capital markets, the conversation about public finance becomes, nakedly, what social justice advocates and realpolitik conservatives have both always insisted it should be – frank talk about the nexus of wealth and power, about economic wrongs and rights. This conversation should be informed by three critical insights: (1) “government intervention” is a meaningless phrase, (2) “deregulation” is a misnomer, and (3) “redistribution”,compared to predistribution, is a sideshow.
Political economy and legal analysis are two sides of the same coin. The struggle of individuals, groups, and institutions for resources occurs in the context of rules normatively crafted by legislators, judges, and bureaucrats, whether you like it or not. Such is the insight of a school of thought known as Legal Realism and its intellectual progeny. In many ways, Legal Realism is a sister paradigm to Modern Money, and to Post-Keynesianism generally, as it encourages people to investigate institutional components, but also recognize the plasticity of those pieces due to their political underpinnings. Realism holds that legal reasoning and legal institutions are inescapably political, rather than natural or autonomous, and that every legal action is soaked with moral controversy and coercion rather than a mere reflection of a neutral rule.
In this vein, one of the greatest Realists, Robert Lee Hale, a Columbia Law School professor and an architect of the New Deal, taught that every market exchange, no matter how ostensibly voluntary or unbiased, exists in the tension of power relations. There is rarely any net liberty or freedom to be gained from the implementation any particular economic policy. Policymakers mostly deal in trade-offs. Granting one person “liberty” almost inevitably entails “coercing” other people who may not recognize that individual’s alleged rights or freedoms.
Hale provides useful illustrations of this thesis in his lucid essay, “Coercion and Distribution in a Supposedly Non-Coercive State”. When the government protects property rights, it is doing two things. Passively, it is refraining from interfering with an owner and owned things. Very actively, however, the state is also forcing non-owners to keep away from owned things if there is no consent of the owner. For example, if Dasani, a homeless child, claims a space to sleep in one of Michael Bloomberg’s mansions when Michael isn’t using it, and Michael rejects her claim, then the full brunt of the legal system—cops, courts, and the clink—will force her out. Homeless kids on the New York City subway are homeless not chiefly because we lack housing, but because trespassing violates tort law. This is an undeniable fact. The state’s protection of private dwellings coerces a child into homelessness, just as protection of private fertile land coerces the landless into wage labor so they might avoid starvation. These are cold, hard premises of the world we live in.
We can extend Hale’s arguments regarding property, contract, and tort into the realm of money itself. Indeed, because U.S. dollar scarcity ceased to be an issue when Uncle Sam abandoned the gold standard, Hale’s insights ring truer and deeper today than in the past. Consider: before the Treasury spends dollars, the Federal Reserve swaps dollars for other assets, or government-licensed banks create asset-liability pairs out of thin air, money does not exist. It follows that the dollars that do not yet exist belong to no one and thus to everyone. From a Realist perspective, even if Michael Bloomberg is a significant taxpayer or bondholder, he does not have an inherently stronger claim to the money yet to pour out of the federal pipes than Dasani does. To choose to distribute money to Michael at the apex of the socioeconomic hierarchy, and then safeguard his claim to ownership with the full force of the law, is to coerce Dasani and others at the socioeconomic periphery.
In a sense, each time a Treasury officer writes a check or a teller creates a loan, she is privatizing public property. Every outlay or loan carves up the money commons. State coercion and economic violence are executed at the tip of the pen. From a Realist perspective, that’s fine, because that’s how economic systems of any kind function effectively. Yet despite this fact, the omnipresence of state violence is often swept under the rug, when we should be honest about what that means: if some people accumulate money at a rapid clip, and others struggle to get by, this is in no small part because the legal system and government agents protect the funds of those at the top. Again, this is undeniable. Some people might work very hard, and others not so much, but the government creates the channels that distribute money, or at the very least delegates and license the plumbing work. After money is pumped out of the money machines, the federal government then sets and enforces the law of commerce, regulating how money can flow between entities in the broader economy. These rules serve as the core of the economy, rendering the concept of “government intervention” meaningless.
The single largest “government interventions” in history are the impositions of classic, “private” bodies of law: property, contract, and tort law, not to mention Constitutional regulations of commercial exchange. Without the policing of these rules of ownership, we would have many more black markets and wild contests of power between private actors. This is why in reality, any laissez faire society would still rely on a set of orderly markets legally designed to preserve land ownership, sanction those who break promises, and protect property against injury. The engineering of markets, of course, predisposes certain people to win and others to lose. Historically, the winners in modern economies are often those who complain about “government intervention” the most, not recognizing the fact that rent, dividends, and subsidies galore exist because of a friendly legal order. Ironically, those who decry state imposition are typically those whose ability to use wealth to absorb more wealth would be threatened if the government truly did “get out of the private sector.” Economic value exists because of a centralized government and its laws, not despite it. And because the facilitative bodies of “private” law assume equality of bargaining power and voluntariness between parties, in doing so, they tend to favor strong players with leverage.
It is worth recognizing, however, that these bodies of laws don’t necessarily have to favor the status quo. Legal categories like property, money, capital, and wealth, are historically at least somewhat malleable, and have been transformed over the ages. Even accounting rules are dynamic. Thus, the question of whom government intervention should favor is one that we should ask within a more civilized discussion of public finance.
If government intervention is a meaningless phrase from a Realist perspective, then deregulation is a misnomer, especially when applying the idea to the hybrid public-private U.S. financial system. State order and legal support is the air that financial markets breathe, beginning with central banks acting as a backstop. Government rules are inseparable from finance. Indeed, laws do not merely govern financial markets—they constitute them. Financial markets are essentially webs of legal contracts, and as such, occupy a place between state and market. As Columbia Law Professor Katharina Pistor writes in her Minskian Legal Theory of Finance, “deregulation” does not mean the absence of regulation, but the implicit delegation of rulemaking predominantly to private actors, with the understanding that the rules those actors issue, and the participants who abide by those rules, will enjoy the full protection of the law courtesy of the U.S. government. Ultimately, whether it’s via agency bureaucrats, licensed private attorneys, or administrative law judges, agents or delegates beholden to the state exercise regulatory power. There is often more delegation of rulemaking, as well as more elasticity of enforcement, near the top of hierarchical financial markets, but regulatory power never disappears. It just flows between different actors.
How does the concept of deregulation as a misnomer inform an evolving conversation about public finance? The idea reinforces the thesis that attempts to transform the financial system so that institutions lend money to certain sectors of the economy are not regulatory interventions that cause a net loss in freedom. Rather, as most corporate lawyers, accountants, and appraisers would testify, there is no “free market.” In 1937, journalist Walter Lippman noted, “while the theorists were talking about laissez faire, men were buying and selling legal titles to property, were chartering corporations, were making and enforcing contracts, were suing for damages.” That insight is even truer today. There are rules that order the operations of businesses, typically in a friendly fashion, and just because a state bureaucrat isn’t explicitly enforcing those rules doesn’t mean state-backed coercive power has disappeared. There is no net gain in “freedom” from nominally deregulatory policies. Rather the questions of liberty in the economy need to be consistently contextualized: Freedom for whom, for what? Financial markets are legal creations in the first place, beginning with the establishment of the central banking system and the chartering of “private” banks. To argue that making financial institutions more inclusive, or even smaller, is an especially coercive or authoritarian action is incoherent.
Here, again, it is worth noting that banks on the whole do not necessarily have a natural way of functioning. Indeed, some of the most significant Constitutional cases in American history, beginning with McCulloch v. Maryland, revolve around the changing structure and public purpose of banks. Mehrsa Baradaran, University of Georgia Law Professor, has mapped the time-honored American tradition of envisioning banks as quasi-public utilities, an idea that began with Alexander Hamilton. That school of thought can be reinvigorated. For example, in the future United States, one could easily envision a monetary-financial system, and a new kind of “bailout”, whereby the federal government makes flat cash transfers to private bank accounts during recessions, skipping various financial intermediaries. Indeed, economist Steven Randy Waldman sketched the architecture for such a scheme in 2010. Four years later, with some knowledge of administrative law, I would say the possibilities are even more promising. Imagine the economy busts and people lose their jobs. The Fed could directly credit post office bank accounts, like the ones Elizabeth Warren endorses, preferably in the form of paychecks for guaranteed jobs. This policy would create set of anti-poverty automatic stabilizers, promote price stability, and strengthen a legitimate public banking option. In any case, the point is that the financial system is a government creature born of coercion and regulation, and its structure can be altered without a threat to universal freedom.
Like financial policy, fiscal policy can evolve via a synthesis of Legal Realism and Post-Keynesian insights. If federal taxes for revenue are obsolete, and the government taxes not to fund social programs, but to drive the currency, maintain price stability, and disincentive certain activities, then fiscal policy is not primarily about redistribution. More accurately, it’s about distribution of entirely new funds and subsequent draining of said funds at the cusp of inflation. This is a truly transformative realization, and as a result, there is much work to be done to integrate the Modern Money framework for distribution with Realist arguments about distributive justice. A useful starting point is to consider how the central thesis of Modern Money—that the U.S. government can and should spend money up until the point price stability is harmfully disrupted for the public—changes legal arguments for basic welfare rights.
Contrary to popular belief, the Supreme Court of the United States was once heading in the direction of assuring Constitutionally guaranteed rights to economic security. This streak of decisions lasted from the New Deal until the 1970s. In the late 1960s, it appeared that Franklin Roosevelt’s Second Bill of Rights might not be explicitly incorporated into the Constitution, but would indeed become, as Emma Coleman Jordan, Professor at Georgetown Law, has stated, a set of constitutive commitments, or implicit government obligations, recognized by the courts. This progressive momentum was ultimately thwarted in 1973 when Nixon-appointed Justices eviscerated the Equal Protection Clause in San Antonio Independent School District v. Rodriguez. But there remains a rich tradition of Constitutional argument that could be robustly empowered by Modern Money observations. Chiefly, an understanding of how money works on a national scale absolutely destroys the notion that taxation is theft, taking from the rich to give to the poor and somehow violating sacred freedoms.
At the same time, dynamic, Realist changes in property law in the 20th Century indicate underlying economic concepts are more malleable than even most MMT economists are prone to note, and thus the parameters of conversation around public finance can be further eased. For example, in Goldberg v. Kelly, (1970), the Supreme Court case enshrined welfare benefits as a form of Constitutional property, opining that “Public Assistance, then, is not mere charity, but a means to ‘promote the general Welfare, and secure the Blessings of Liberty to ourselves and our posterity”, allowing people to meaningfully participate in community and political life. With that decision, welfare benefits joined a list of things, like bank accounts, that were not initially considered property via common law but have since achieved that status.
Similarly, another string of cases did not transform legal categories of the economy, but protected low-income people from discrimination in the context of public finance. In Griffin v. Illinois, (1956), the Supreme Court held that a criminal defendant may not be denied the right to appeal by inability to pay for a trial transcript, finally recognizing that laws that may not be discriminatory against low-income people on paper may be discriminatory in practice. In the striking case of Department of Agriculture v. Moreno, (1973), the Court prohibited withholding of food stamps from household based on their familial composition. Without explicitly stating such, the Court showed willingness to require a substantive reason for exclusion from basic economic guarantees. Moreno has never been overruled. It’s still “good law.”
Thus, Legal Realist arguments in context of case law demonstrate it is possible and reasonable to interpret the Constitution to include basic socioeconomic rights. Reciprocally, Modern Money grants sound economic arguments as to how the government can “afford” to ensure those basic rights, or at least cannot reasonably discriminate in the distribution of current funds due to an appeal to fiscal soundness. The deep penetrating questions mentioned at the beginning of this essay can enter the courts. For example, if there is no money scarcity, only real resource scarcity, and taxes and bond payments don’t necessarily link to outlays, who is to say they deserve monetary stimulus more than anyone else? There’s a lawsuit in the making. If there is no affordability constraint until there is inflation, what are the rational bases for excluding some people from adequate public benefits based on their level of wealth? There’s a strengthened argument for litigation. When we recognize that federal taxation and borrowing are functionally separate from expenditure, the moral landscape changes. We can go deeper and deeper. If the federal government has excess funds and there is no threat of inflation, what is the compelling argument against a right to the minimum level of purchasing power necessary to ensure a secure livelihood? If the federal government doesn’t need the money to fund other programs, what is the compelling justification for why working people should suffer from regressive taxes like the payroll tax? At the very least, Modern Money breathes new life into legal arguments against socioeconomic discrimination.
Perhaps the most promising areas to alleviate the discriminatory impact of public are the intersections between class and race, gender, and other categories of identity. In her essay, Stimulus and Civil Rights,Columbia Law Professor Olatunde Johnson elegantly outlines how “federal spending has the capacity to perpetuate racial inequality, not simply through explicit exclusion, but through choices made in the legislative and institutional design of spending programs.” It is increasingly clear from recentsocial science literature that federal grant programs, especially regarding housing and transportation, generate significant racial harms.If there is no money scarcity, as Modern Money argues, that sort of discrimination becomes increasingly unacceptable. In the context of recession, if key aspects of federal outlays entrench funding and programmatic structures that promote inequality, for example, by lending to banks or infrastructure projects that do not historically channel money to women or people of color, then that is constitutionally problematic. Unless there is rampant inflation, issues of disparate impact cannot be diffused by appeals to a balanced fisc. Money, so often conflated with real wealth, is not a legitimate obstacle to equality and the freedom it can bring.
It is worth remembering that for Legal Realists, rights do not fall from the sky. They are demanded in the face of social wrongs, sought via politics, wrought via law. They must be fought for, if not in the streets, then in the courthouses. The Equal Protection Clause is not likely to be the most important or effective tool for achieving basic economic security going forward, but an understanding of Modern Money could retool and refuel Justice Sonia Sotomayor’s opinions in ways Justices Thurgood Marshall and William Brennan could never have dreamt of. Professor Johnson writes of the need for federal spending to be a focus for advancing citizenship and inclusion. Emma Coleman Jordan and fellow professor Angela P. Harris are fighting for anti-subordinationist justice in the face of crass economic analysis by judges. Comprehension of the Modern Money framework would strengthen the arguments of social justice advocates and make their goals more viable than ever.
Many of the traditional arguments about public finance are still relevant, but we have to be honest about the legal and operational contours of how money works. As this essay indicates, I am squarely in the camp of guaranteeing basic economic security: government funding of jobs for all, the creation of public bank accounts, and the end of brutal, barbaric taxation. I think progressive public finance is no longer so much about redistributing money, as it is about distributing money in order to spur real growth for particular people in particular sectors. There is no doubt that many wealthy individuals need to be taxed and disciplined in the interest of democracy, but we need not make social spending dependent on those taxes. It’s functionally unnecessary. To quote Johnson again, “the sheer amount of new federal money provided to states under the stimulus, and the conditions attached to some of these federal funds, raise questions about the federal government’s expanding power to shape, through spending, a broad set of institutional arrangements at the state and local levels.” Considering it’s all new federal money, that statement is even more important than Johnson seems to indicate. The scope of our discussion about public finance needs to be magnified.
For example, although at the end of the day, poverty is relative, there is now much we can do to end absolute indignities, given sufficient knowledge of the legal-financial matrix. As Emma Coleman Jordan has stated, what passes as rational conversation about economic policy choices these days is “devoid of all understanding and empathy for the choices of people who have no choice.” I’d add it is also devoid of institutional perspective and accuracy regarding modern money, functional finance, and national accounting. In the words of a recently deceased human rights activist, Yuri Kochiyama, consciousness is power, and with a revamped economic education, social justice advocates can build tomorrow’s world.
But these are my normative opinions. The chief point is that we need to have an honest conversation based on a shared mechanical understanding of the nuts and bolts of the economy, as well as its legal framework. Having subscribed to that, we can debate about what we want. As Justice Oliver Wendell Holmes once protested in another era of rampant inequality and mythmaking, the 14th Amendment did not enact Herbert Spencer’s Social Statics. The Constitution shouldn’t be read as reliant upon an outdated and unsound doctrine of public finance either. We need to plug into reality, and then we can discuss what we want to do to change it, if anything. Beyond the myths about money, beyond the intellectually impotent and incoherent conceptions of government intervention, deregulation, and redistribution, we can have that real talk about who gets what, when, where, how, and why.